In addition, from 6 April 2008, to complement these CGT changes, an entrepreneurs' relief is being introduced which will be available when an individual sells their business. This means that the first £1,000,000 will be charged to tax at 10% and gains in excess of the £1,000,000 limit will be charged to CGT at 18%.
The Treasury has announced that it doesn't see the need for a change to the taxation of insurance bonds as a result of the CGT changes. As a result, a policyholder is still subject to income tax at their marginal rate of tax on the event of a chargeable event gain.
Analysis
Even though the 18% flat rate of CGT, which would apply to collectives, looks more attractive than a potential income tax charge at 40% on a chargeable event gain with a bond, there are other factors to consider.
There would also be an annual income tax charge to consider on the dividend/interest distributions from collectives even if this is accumulated which would be 32.5%/40% in the case of a higher rate taxpayer. Investment bonds offer the policyholder tax deferral in that clients can access money through the 5% tax deferred allowance, without incurring an annual income tax charge.
Bonds are self-assessment friendly, as withdrawals within the 5% tax deferred allowance don't need to go on the tax return. Only chargeable event gains need to be put on the tax return.
Withdrawals within the 5% tax deferred allowance don't affect a client's entitlement to age allowance.
Investment bond holdings may be deemed excepted assets for means testing.
IHT planning - bonds are ideal assets for trustees to hold due to the administrative simplicity they offer. If trustees hold collectives, then they will have to consider the completion of annual tax returns and the associated professional costs.
It makes sense for everyone to have all policies and investments reviewed by an independent financial adviser to ensure that the charges are fair and the underlying investment performance is at least as good as the average performing funds. The consequences of not doing this can be extremely costly.
